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Xiaomi's $45bn formula for success (and no, it's not 'copy Apple')

There's an easy-to-miss showroom on Maofang Road, in north Beijing's Haidian District, where you can lean over long pale-wood Apple Store-type benches to play with familiar-looking Mi Pads and Mi phones, as T-shirted staff offer to help you sync with Mi TV smart displays or Mi Cloud remote storage.

The airy minimalism of the store's design leaves no doubt as to which California company inspired it: amid a neat wall display of phone covers and chargers, only a giant red "Mi" sign indicates that it actually belongs to an assembled-in-China technology company, Xiaomi, whose CEO and founder, Lei Jun, acknowledges being "greatly influenced" at college by reading about Steve Jobs. Indeed, when Lei announced the Mi 4 phone on stage in July 2014, he declared that Xiaomi had approached the iPhone's manufacturers to see how they might contribute. If the Apple influence wasn't clear enough, he then introduced Xiaomi's new fitness band with a Jobsian "One more thing..."

But this is not a story about a Chinese interloper cloning Apple's IP and originality (though Jony Ive, Apple's chief design officer, did use Vanity Fair's New Establishment Summit in San Francisco three months later to accuse Xiaomi of downright "theft").

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It is, instead, a tale of how Lei built a company priced by its investors at $45 billion (£31bn) -- briefly the world's most valuable tech startup -- by creating not a smartphone business, but a new kind of internet-enabled ecosystem: one that turns customers into "fans" who co-design and then evangelise products; that transfers market-demand risk to small hardware startups in which it tactically invests; that slashes costs by minimising inventory and optimising supply chains in fresh ways; and that, by selling high-quality devices at prices so low as to obliterate margins while profiting from services, content and accessories, is innovating at the top of its market.

In five years, Xiaomi has built a base of 160 million phone users, entered markets such as Indonesia and India, and challenged western assumptions of how Chinese tech companies think. Get ready to copy China.

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"We're a very different Chinese company: we spare no costs in ensuring the high quality of each and every Mi product," Lei, who speaks little English, tells WIRED through a translator. "I believe Xiaomi will provide the impetus to raise the quality bar of all China-made products, and will eventually help to lead to a perception that China is no longer about cheap manufacturing and copycats. Over the years, Xiaomi's mission has evolved into changing the world's view of Chinese products.

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Xiaomi insists it is an internet company, not a smartphone business -- although it has had extraordinary success in selling phones. The company's Twitter archive is a chronicle of growth: on December 18, 2011, it reports selling 100,000 phones in three hours; on April 24, 2012, it sold 150,000 in 15 minutes; and by September 20, 2012, it took just four minutes to sell 300,000.

In 2012, Xiaomi sold 7.2m phones; the next year it sold 18.7m; and in 2014 it sold 61m, becoming China's biggest phone maker. It sold "over 70m" phones in 2015, vying with Huawei for the lead in China. But it has been expanding internationally in high-population emerging markets under Hugo Barra, formerly head of product management for Android at Google. In April 2014, it bought the Mi.com domain for $3.6m, the record for China, as part of that internationalisation -- not least because Mi is easier for foreigners to pronounce than Xiaomi ("sha-oh-me").

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But Lei doesn't want WIRED readers to see his company as a manufacturer of quality devices: "Think of Xiaomi as a company that is bringing innovation to everyone. We put an emphasis on high-quality products that help to create a connected lifestyle for everyone as we move into a new era of technological innovation. This doesn't only mean smartphones, tablets, TVs, routers -- we invest in startups that form what we call an ecosystem. They make products that are sold on Mi.com, ranging from power banks to wearables to air and water purifiers, so we have hundreds of products that come together to create a lifestyle."

He also wants to explode the myth that Chinese companies copy from the west. "There is a lot of innovation in China that I would think even the west hasn't caught up with," he reflects. "Look at WeChat: people think of it as a messaging app, but it has grown to become a platform that incorporates gaming, payments, internet services. Xiaomi is a smartphone company, but we are also an e-commerce company -- Mi.com is the third-largest e-commerce site in China -- and an internet services company, which even publishes games. We also incubate startups by investing in them and helping them to make products that we then sell on Mi.com.

4.2 secondsTime it took to sell 100,000 phones during a flash sale in India in October 2014

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"Our motto," he continues, "is: Less is more. By focusing on making a small number of products, we can be the best at what we do. But when less is more, it means you need other companies to help you do more things. Therefore, we invest in other companies and form an ecosystem to create more products."

A stray dog adopted from a nearby building site excitedly greets visitors to Xiaomi's headquarters building on Maofang Road in Beijing. Corridor walls are covered with vast French Impressionist art prints; Xiaomi's Mi Bunny mascot stares ubiquitously out of office shelves. Desks are busily occupied at 8pm this October Wednesday: Xiaomi is, a spokeswoman explains, a "nine-nine-six company", where staff work 9am to 9pm, six days a week.

Customers, too, appear mission-driven: wall posters advertise "Mi Pop" parties where brand loyalists can dance on-stage with senior executives. Display cabinets showcase home-made gifts sent in by fans: Lei Jun and Hugo Barra action figures; branded sneakers; phone cases made out of carefully patterned millet seeds. Millet is a literal translation of Xiaomi's name in Mandarin, though in China a more subtle etymology resonates: in 1946, Mao Zedong predicted in a famous speech that his underdog Communists, armed only with "millet and rifles", would defeat the better-armed Nationalists. Lei has also suggested that Mi stands for "mobile internet" and also his company's "mission impossible" in taking on the incumbents. "Ten years ago, I came to the conclusion that mobile internet is the future," he says. "I'm crazy about smartphones. When the first iPhone and Android smartphone were released, I decided to make an Android smartphone." His operating system, called MIUI, would be different: its users could suggest improvements that would be incorporated in weekly updates. As he put it last April, in a speech marking Xiaomi's fifth birthday, "We treat our customers as our friends, and take into consideration all their feedback... We believe our users, we listen and make friends with them."

Lei, 46, was born in Xiantao, Hubei, in east-central China and studied computer science at Wuhan University. While a student, he read Fire in the Valley, Paul Freiberger and Michael Swaine's book about the computer industry's birth, and -- fascinated by Steve Jobs -- decided "to establish a company that was first class", as he later told The New York Times. In 1992, a year after graduating, he joined a software company called Kingsoft, rising to become president and CEO.

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He stayed until it listed on the Hong Kong stock exchange in 2007; he had, meanwhile, launched Joyo.com, an online bookshop, which Amazon bought for $75m in 2004. On leaving Kingsoft he became one of China's dominant angel investors, with standout companies such as social gaming portal YY and mobile internet company UCWeb in his portfolio. And then, in April 2010, he founded Xiaomi, before going on to recruit seven other co-founders. "Before I met Lei Jun I hadn't heard of him," recalls Liu De, Xiaomi's head of ecosystem products, then a 37-year-old industrial-design teacher whose wife had been college roommates with the wife of another co-founder, Hong Feng. "The co-founders were strangers who'd come from places such as Google, Motorola and Kingsoft. When Lei Jun first met me, he talked about the potential of smartphones and asked if I'd join him. I rejected him. And then I spent a month thinking about the big opportunity."

Liu, 42, is sitting in black shirt and jeans in an office with a Mi air purifier, 60" Mi TV screen, Mi Smart weighing scales and Yeelight smart light bulbs (sold by Xiaomi). Liu's 70-person department is responsible for the accessories sold at Mi.com and in the showcase Mi Home centres, of which there are now 22 in mainland China, Hong Kong and Taiwan: the phone-controlled Yi action camera (on Amazon at £53); the Mi Band wristband (a million a month sold at 79 RMB or £8.20); the 10,400mAh Mi Power Bank (more than 10m sold, 69 RMB or £7.15); the 60" TV (4,999 RMB or £520); even the Mi Bunny (2m sold in 2014). Yet Xiaomi makes only smartphones and tablets, TVs and set-top boxes, and routers; everything else is produced by independent companies in which Xiaomi has invested between $100,000 and $500,000, from the smart blood-pressure monitor (made by California's iHealth Labs) to Yunmi Technology's water purifier. "We sell 600 items," Liu says. "If we did this alone, we'd need 20,000 people in the company, but we have only 8,000. We've reviewed 600 startups in the past two years, and invested in 54. We help them define their product and use our sales channel, supply chain, branding and financing. They're our special forces, and we are the commander."

When Lei Jun first met me, he talked about the potential of smartphones and asked if I'd join him to create a new company. I rejected himLiu De

It's 20 engineers, not finance people, who make the investment decisions. "Usually within one meeting," Liu says. "We respond much faster than traditional investors. It's a totally new model for high-tech innovation. Most VCs and investors tend to have experience in software and internet companies, not hardware -- so a lot of the famous VCs rely on Xiaomi's judgment and follow up on our investments."

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But why not acquire the talent to build the products in-house? "Small companies move much faster than we could," Liu explains. "You have to stay nimble and adapt to change very fast. This is entirely different from a company having different departments to produce various products. AT&T, for example, was leading for 70 years but was succeeded by IBM; 20 years later, IBM was overtaken by Microsoft. Ten years later, Google overtook Microsoft; and in four years Facebook grew up.

Traditional companies are like a tree, taking time to grow -- but when they fall, they fall fast. Xiaomi's approach is more of a bamboo forest: have you ever seen a bamboo forest die off? No, new baby bamboo is always growing fast to replenish it. By investing in these portfolio companies, we're creating our own baby bamboo. We're building an ecosystem like a bamboo forest. "We don't care about a company's valuation -- only whether it has the best product and team. These 20 engineers will join the companies' boards, but never as an opposition vote. We respect the founders and their dreams." Still, the startups gain access to 160m consumers: within a year, ZMI, the power-bank startup, had become the world's largest, Liu says, and the Mi Band manufacturer, Huami, had sold ten million in six months. "The internet of things will be even more significant than smartphones and mobile internet," Liu says. "Wearables, watches, scales, home appliances will be connected, and your smartphone will be the connector. We need to grab this opportunity. The ecosystem is our bet on the future. In ten years' time, people will see that Xiaomi has changed the Chinese market."

Three days before WIRED's visit, Xiaomi announced the Ninebot Mini, a 16kph self-balancing scooter made by one of its portfolio companies. Louie Gao, Ninebot's CEO and founder, explains that Xiaomi is "much more involved than a typical investor - they'll give feedback, help iterate the design, make intros to supply partners, offer sales channels... That could mean a five-fold difference in sales volumes. Lei Jun gave feedback about its appearance - he suggested the shape of its knee-high handles."

Xiaomi's team helped five-year-old Ninebot in its 2015 acquisition of Segway. "Segway didn't sustain its early hype," Gao says, "but with Ninebot, people will see our next products and go, 'That's really cool, and at an appealing price.' We're working on a uniwheel self-balancing personal scooter -- and we're looking at service robots."

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The trouble in China, Gao reflects, is meeting demand once the market decides that it likes you. "There's a saying in China that with hardware, slow is actually fast. If you take your time to iterate, when it finally explodes on to the market you can meet that demand and scale much faster -- unlike the Kickstarter model, where delays cause the hype to die. And with Xiaomi, pre-registration numbers were beyond our expectations. So our challenge is to make sure customers get their products on time."

The true value of a Chinese internet business, Hugo Barra explains, lies simply in "having a tonne of users", even if they're not initially bringing a company any significant revenue. It's an approach that some western companies would have benefited from: where eBay charged fees to sellers, Alibaba made transactions free in order to build volume fast -- and then used its scale to develop dominant and profitable products such Alipay, whereas eBay revenue is declining. "The only thing we really care about with all the products we sell today is our mobile internet platform," Barra, 39, says. "Our phones are the distribution vehicle for our platform -- we don't care about selling phones, but about getting as many users as we can. Then we can build a games business, a content business in movies and music and news, a virtual carrier -- we have a mobile virtual network today operated by just ten employees. We can build a finance business -- Mi Finance -- that lets you take out loans and invest in money-market funds. These users are coming from the traffic we have on our platform. People think we're a smartphone company -- we're actually an internet company."

This, Barra says, is why Liu De's ecosystem is such a crucial innovation in a world of commodified smartphones. "From an internet-thinking perspective, just having smartphones that are better than all the other smartphones out there may not be enough," he says. "We need to sell cooler products and have a lot of them coming at all times, so people keep coming back to our website, our store. This ecosystem of smart devices is an important element of our user acquisition and retention strategy. It's a virtuous circle: once you buy one of these smart devices, a smart light or a water purifier, you want the next one.

2.1 MILLIONNumber of phones Xiaomi sold online during a single 12-hour period in April 2015

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"And if you're an entrepreneur in a partner company, and your life depends on the product you're building, you're going to work much more passionately. If you're a partner in a big company, it doesn't really matter if the product does well -- your stock options will still be there. But if you're the entrepreneur and your product fails, you're done. So you're much more driven to build an amazing product. Take our power-bank company, ZMI: they make and sell two million power banks a month, Xiaomi branded. The second most popular power bank is fake Xiaomi. People are copying our designs! Our wearables company, Huami, is already hitting 1.5m smartbands a month. It all comes back to our internet way of thinking -- acquiring users with amazing products, keeping them loyal, increasing their engagement and monetising them."

Some western companies, Barra says, have similarly mastered internet thinking ("platform followed by monetisation"): he mentions Uber, and Google's Android team, from which he joined Xiaomi in October 2013. "But there's something pretty unique about China. Guys like [Alibaba's] Jack Ma, [TenCent's] Pony Ma, Lei Jun have boundless thinking -- it's unbelievable how they can take an idea, execute it, make it enormous in a couple of weeks. With the manufacturing capability that exists here, China will become the leader in consumer electronics not just in execution but in innovation. Just give this ecosystem a few years. "There are two things that are vital if you want to apply internet thinking to consumer products, and that's focus and scale. At Xiaomi we only make one model of any product, so even with our high R&D costs, our unit cost is much smaller than other people's. And, because our scale is so big, our cost per unit produced goes down over time. Plus, we know our users. The Mi community is hugely important and is inseparable from this platform approach. They invest huge amounts of time volunteering, they produce some of our best content. You can't replace the community with any marketing strategy in the world."

Xiaomi's chat boards have 58 million members, with a million "Mi fans" active on any day. Li Ming, employee number nine, has led a team of 20 in moderating forums, running fan events and collecting feedback. Xiaomi invites fans to Mi Pop "popcorn parties" where hundreds might dance on stage with Hugo Barra wearing a rock-star wig, or get early access to products. "They're not users, not customers, but friends, from the bottom of our hearts," says Li, 34. "Initially it was in meeting rooms; now it's in nightclubs. We've even done a yacht." Mi community members also self-organise six or seven hundred smaller events a year in 120 cities.

The buzz shifts product: when Xiaomi celebrated its fifth birthday with a Mi Fan Festival last April, it set a world record by selling 2,112,010 phones online in 24 hours. But just as valuable is the communication. "On social media, you can shout about your new products, but you have no idea whether someone's a Xiaomi user. The Mi community is a home where you find a sense of belonging."

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And that results in loyalty -- "stickiness", as Li puts it. "Traditional companies just want to sell product; we want to interact and gain users' feedback. When you have a community, you easily build word of mouth." Feedback also elucidates local demand. "We launched the Mi 4i phone in India -- but after lots of Chinese users said they wanted it, we came up with the Mi 4c for China. We take feedback seriously."

WIRED points out that OnePlus (WIRED 09.15), another Chinese handset maker, also involves its community in product iteration. "They probably took a few tips from our book," Li says, dismissively. "Chinese smartphone companies all try to copy Xiaomi's engagement style, but it's not something you do by hiring a few employees; it's a culture that emanates from Lei Jun."

Each day, our users use their phone 115 times and spend four and half hours on it. Just imagine what a powerful broadcast platform I have!Lei Jun

What about Xiaomi's famous flash sales, in which it has built buzz by limiting phones' availability? "We have never deliberately created scarcity marketing," Li insists. "People have this idea because, as a small company, we could only do limited manufacturing, so some people couldn't get their hands on our phones. Even when we grew bigger, we couldn't match demand." When it has stock, it wants to shift it quickly: so quickly that, during one sale in 2014, it sold 100,000 units in 4.2 seconds.

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Huawei may have challenged its dominance in China last year, but Xiaomi is not keeping still. Since entering India in July 2014, it's launched in Singapore, the Philippines, Malaysia and beyond. In the Middle East and North Africa, partner distributors have introduced Xiaomi phones. Its western expansion may be hampered by intellectual-property questions -- although Lei Jun says Xiaomi has applied for more than 6,000 of its own patents since 2014. It's also committed a reported $1bn to Chinese-language TV content. As Lei told The Wall Street Journal last October, "Each day, our users use their phone 115 times and spend four and half hours on it. Just imagine what a powerful broadcast platform I have!"

Six months earlier, Lei, who is reported to be married with two daughters (Xiaomi says that it has no "visibility" in such matters), gave a talk titled "What is the future of Xiaomi?". "One day, Xiaomi will be like Sony in the 1970s, leading Japanese manufacturing; like Samsung in the 1980s and 1990s, dominating Korea," he said. "In ten years' time, China will lead various fields in the world."

14 hoursLei Jun's typical work day, six days a week, according to co-founder Liu De

Meanwhile, he is determined to rewrite the narrative that Xiaomi sits in the shadow of Apple -- framing Lei as a copycat. The "one more thing" line was a joke, a spokeswoman insists. "The Steve Jobs thing is just surface impression," says Liu De. Lei is frustrated. "Mr Jobs was a great man," he posted on Xiaomi's website in October 2013. "He did brilliant things, he changed the world, and was a huge inspiration to Xiaomi. But to use him as a point of comparison for myself is completely inappropriate."

WIRED asks him to explain his personal relationship with Jobs and Apple. "I respect Steve Jobs for what he achieved," he says through his translator.

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"But Xiaomi is a different company from Apple. We are very open and we place emphasis on engaging our users, our Mi fans, incorporating their feedback and even having parties with them. We believe in bringing innovation to everyone, which is why we are conscious about pricing our products close to cost." "The role of China in the world is going to be much better understood in the next couple of years," Hugo Barra says. "It's going to be all about entrepreneurship, focus and scale. The world has a lesson or two to learn from China's internet way of thinking."

David Rowan is editor of WIRED. He wrote about Facebook's plans for Messenger in issue 11.15

This article was first published in the April 2016 issue of WIRED magazine